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At a Brussels joint lunchtime meeting with the European Centre for Advanced Research in Economics (ECARE, at the Université Libre de Bruxelles) on 16 June, Michael Burda presented results of recent research on German unification. Burda is Associate Professor of Economics at the Institut Européen d'Administration des Affaires (INSEAD), on leave at the Wissenschaftszentrum Berlin für Sozialforschung, and a Research Fellow in CEPR's International Macroeconomics programme. His talk was based in part on his CEPR Discussion Paper No. 652, `Trade Unions, Wages and Structural Adjustment in the New German States', written with Michael Funke. The views expressed were his own, however, and not those of ECARE nor of CEPR, which takes no institutional policy positions.Burda noted that the sentiments of politicians, economists and the general public during the two years since German economic, monetary and social union have run the gamut from drunken euphoria to a state of severe hangover. The unification of the two Germanies led to costs that were totally unforeseen by most policy-makers and predicted by only a handful of economists. Wages currently exceed productivity in many manufacturing sectors and for the economy as a whole. This has led to large transfers of Western resources to the East, which may rise to DM 170 billion in 1992. To stop this haemorrhage of resources and prevent the development of a `Mezzogiorno' region in Eastern Germany, its workers' productivity will have to rise dramatically. Thus in turn will require substantial physical (private and infrastructural) investment, perhaps up to DM 1-200 billion per annum for the next decade, so Eastern Germans must begin saving rather than consuming the transfers they receive. Burda maintained that the integration of Germany's two regions is ultimately a race between two factors: capital and labour. If unemployment emerges on a large scale, Eastern Germans may migrate in larger numbers than their current 2-3,000 per week (and empirical evidence indicates that high levels of actual and pending unemployment have greater effects on migration than wage differentials). If investment is sufficiently robust, however, this could raise productivity and `validate' the current ambitious wage path planned by unions, although it is well known that wage increases tend to reduce the value of the firm and hence investment. High wages may also induce workers to invest in upgrading their human capital, which suggests an alternative means by which high wages can be validated. The sharp rise of Eastern wages seems inevitable in the immediate border areas between the old and new Länder and of course in Berlin. On the other hand, larger wage differentials may encourage investment in remote regions, at least in the short run, thus helping to accelerate their development. If unions and employers' associations enforce a common wage (as they do in West Germany), the Mezzogiorno scenario seems quite likely, and even more investment will move to Czechoslovakia and Poland. Current anecdotal evidence suggests, however, that there may be some degree of wage differentiation. The social implications of such developments could be buffered by individual-linked subsidies to `stay put'; although the government's recent decision to raise rents in the East which is again leading to remarkably high rates of inflation in East Germany will tend to work against this objective. Burda compared and contrasted the experiences of the ex-GDR and Czechoslovakia, which both possessed similar populations, industrial structures, and standards of living both before and after World War II but adopted radically different approaches to their transformation to market economies. Through economic and monetary union with West Germany, East Germany benefited from an established legal and social infrastructure as well as a well- endowed partner that was willing to make transfer payments on the order of 50-100% of East German GDP. On the other hand, the East German economy sustained a crippling appreciation of the real exchange rate and the collapse of demand for domestic output. In contrast, Czechoslovakia was able to effect a sharp devaluation in real terms and thereby delay considerably or even avert the 50-60% cumulative collapse of industrial output seen in its northern neighbour. Privatization has also been managed differently in the two economies. The Treuhandanstalt completely bypassed the implicit ownership claims of the local (East German) population, instead favouring the placement of productive assets quickly in the hands of those willing to undertake new investment. A more `democratic' and possibly riskier privatization process is now under way in Czechoslovakia: the shake-out that is expected to ensue once the first round is complete will certainly raise its currently stabilized modest rate of unemployment (about 6%); the key factor is the ability of the labour market to manage structural change and the determination of wages. |